Brad Feld

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Entity Conversions In Delaware Just Got Easier

Mar 18, 2006

Several months ago I wrote a post on the best corporate structure for an early stage company.  I followed it up with a post on S-Corp’s vs. LLC’s.  There were some good comments and these posts generated plenty of questions. 

The other day I got a note from a reader (a lawyer no less) who pointed out that there were several changes on 8/1/05 to Section 265 of DCGL (Delaware Corporate General Law for those of you not up on your legal acronyms) that allow for two important “innovations” in the area of “entity conversions” (yeah – exciting – I know – but important for all you entrepreneurs out there wrestling with where to incorporate and what type of entity you should have.)

The first innovation creates a simpler process for the reincorporation of non-Delaware corporations in Delaware (through a one-step “conversion” rather than through the traditional but cumbersome reverse merger of the non-Delaware corporation into a wholly-owned Delaware sub.) In English – if you are incorporated in a state other than Delaware and want to reincorporate in Delaware – it’s now a lot easier.

The second innovation allows for the one-step conversion of non-Delaware limited liability companies into Delaware corporations.  These conversions/reincorporations have historically required 2 steps – for instance, an Ohio LLC would be merged into a newly-formed Delaware LLC, and then that Delaware LLC would be converted into a Delaware corporation.  Now you can go from an Ohio LLC to a Delaware corporation in one step.  This eliminates one of my main objections to LLC’s that I wrote about in S-Corp’s vs. LLC’s.

As always, please road test this with your lawyer.  I’m just a guy that doesn’t ever make legal recommendations.